Dear states attorneys general in Ohio, Texas, Florida and California (and to the rest of you as well):

Let me make it easy for you. It’s much easier to find the wrongdoing if you know where to look, so let me give you a generic road map:

1)  The mortgage originator is the entity that met with homeowner (unless there was a mortgage broker involved) and actually did the mortgage transaction with the homeowner, a.k.a. “the closing." The originator had the wet ink documents in its hands at some time.

In many cases the wet ink documents never left the originator. This creates a problem down the line because often the originators were small short-lived businesses. When businesses went belly-up holding all those wet ink original documents, where did the documents go? . . .

2)  Immediately (by which I mean within a very few days, sometimes a very few hours) after the closing, the originator would resell the mortgage to a bigger bank. This would free up cash for the originator to make more origination next week. The originator would electronically scan a copy of the closing documents and email them to a data bank, most often that data bank was called MERS. In later iterations, some originators would upload the scans directly into the data bank.

3)  If an assignment was done at all — and very often it was not — it would often be done in blank. That is to say, John Smith, President of Originating Firm would assign to _______. However, a blank assignment is like a check with the payee left blank; it becomes a bearer instrument (and for this reason a rather dangerous item). When it became known to what entity the mortgage should be assigned, John Smith (or his successor at Originating Firm) would be asked to do the assignment after the fact.

4)  However, the originating mortgage company may have gone out of business before any assignments were done; who or what was left with legal authority to assign these mortgages, and where did the wet ink originals end up? I know anecdotally that these wet ink originals sometimes ended up going home with the laid-off workers of the mortgage companies. These people worried often that the documents would be destroyed if not kept safe and the lack of paper trail would cause the homeowners all kind of grief if they tried to sell their homes. In some cases, the laid-off mortgage company workers hoped to hold the documents hostage to collect back wages they were owed when the mortgage company failed.

5)  All of this could have been avoided, of course, if the mortgages had been recorded in the county clerk’s office or land office, or in other governmental Torrens title system.

6)  Sometimes the wet ink originals really were physically transferred to MERS, but MERS appears to have treated the physical files as unimportant because MERS and other electronic database services like it were intended to allow transfer of documents electronically, avoiding costly and time-consuming handling of paper documentation. When challenged to come up with wet ink originals, the electronic filing system has not always worked so smoothly.

7)  The bank that thought it bought the mortgage from the originator (it paid money, but what did it actually get in return?) would enter into a “Pooling and Servicing Agreement” in order to create a Residential Mortgage Backed Security (RMBS). The purchasing bank, or another bank that it thought it sold the mortgage to, would become the “depositing bank” and deposit (or so it thought) the mortgage into a trust fund. Except that it didn’t actually have the mortgage to deposit.

8)  The trust fund would have a set period during which it could accept deposits, after which the trust fund was “closed” and no additional mortgages could be deposited into it except as swap-outs for mortgages already in the trust. Any assignment of mortgage into the trust executed after the closing of the deposit period would be a legal nullity unless there was a swap with a mortgage already in the trust.

9)  The assignments were rarely actually made in a timely fashion, and now it’s too late to do so. In addition the entities which could have made the assignments don’t necessarily even exist anymore.

10)  The trustee assigned or sold the right to collect the payments to the “servicer”  and the “investors” thereby splitting the interest in land  from the debt (mortgage fractionalization). The servicer collects the money from the homeowner, takes its substantial cut and forwards the remainder to the investors. The investors thought they were getting A or better rated bonds and include municipalities, and pension funds.

11)  When the foreclosure tsunami first began and the foreclosing banks had no original wet ink documents to prove that they had standing to foreclose, there was a wave of “lost note affidavits”. Judges at the front end of this crisis had no inkling that anything was amiss and relied upon those affidavits. After seeing reams of lost note affidavits, they began asking for better explanations.

12)  That’s when the forgeries and perjuries began. There are all sorts of people signing all sorts of documents claiming to be officers of companies for which they do not work. Contact me and I can email you a list.

There are all sorts of signatures that don’t look at all alike, all with the same person’s name. In at least one instance the name of a person who was in jail at the time and not available to be working at the company appears on documents along with his purported signature.

Color scans of mortgage papers are being passed off as wet ink originals; you can see the color printer dot matrix under magnification. Documents are being backdated, which is really fun when you find out the notary was not yet a notary on the date shown on the documents.

13)  Adding to the confusion, a bank may believe that it services or is trustee for, or has a particular mortgage in an RMBS solely because a mortgage  is included on an inventory list attached to a pooling and servicing agreement. However, any given mortgage might be on the wrong list, either because there was a typo when preparing a list or because an unscrupulous originator “sold” the same loan twice, or a sloppy originator accidently put the same loan on two different lists. If the original wet ink originals had been physically transferred, we would be able to match up payments from the banks with the originals and figure out who owned what.

14) Lastly, depending on the law in your state, separating the interest in land from the right to receive payment — frationalization—may have extinguished the the right to foreclose and turned the mortgage debt into regular unsecured debt. Check out 55 Am. Jur. 2d, Mortgages § 1002.

[Ed. note: If you'd like to make sure the states attorneys general mentioned here are aware of this post, see comment 13 below.]
[Photo: Cowtools via Flickr]